The Economy in Perspective

The Economy in Perspective

Article excerpt

Normalization, of a sort ... The current expansion, which began in November 2001, followed a mild eight-month contraction (since 1945, the average length of contractions has been 10 months). In one sense, all contractions are alike because the National Bureau of Economic Research (NBER) determines the dates of business cycle peaks and troughs by applying a standard set of measurement criteria. In a nutshell, the NBER defines a contraction as a period of significant decline in economic activity, lasting more than a few months, and in which the decline is spread across the economy and evident in spending, income, sales, production, and employment. An expansion begins when these patterns no longer are evident, although the NBER notes that when an upturn begins, economic activity is "... typically below normal and sometimes remains so well into the expansion."

Many aspects of economic activity have returned to normal, or nearly normal, conditions. Orders and shipments for manufactured goods have been steadily rising during the past year as business firms, flush with cash, have finally begun to step up the pace of their capital spending. Households have continued buying homes and automobiles in large quantities, but the pace of overall retail sales has been somewhat more subdued. Capacity utilization has been climbing, and the overall rate is now on track with the average of past expansions. Most economic forecasters expect the economy to extend its three-year-long expansion into 2005 and beyond. The economy seems to be on a sustainable expansion track, inflation and inflation expectations are low, and the Federal Reserve has been patiently removing its policy accommodation during the past several months.

Labor markets have performed in a conspicuously atypical manner. Typically, employment continues to fall in the early stages of an expansion, but stops falling in about a year; after two years, employment returns to its prerecession peak. In this expansion, payroll employment did not stop falling for nearly two and one-half years; it has yet to return to its previous peak. The weak pattern seems fairly broad based, suggesting that whatever forces are holding back the pace of net job creation are affecting most industries and regions.

A number of explanations have been advanced for the unusually slow rate of job growth, but analysts have yet to reach a consensus. Some focus on subpar total demand in the economy, while others consider possible mismatches between the labor skills that are in demand by employers and the labor skills being offered in the market. …